Legal Bulletins

It is a common practice of many employers to deduct the cost of damaged or lost equipment, such as cell phones, laptops and vehicles, from the salary of employees. In a recent Opinion Letter, the Department of Labor (“DOL”) ruled that such deductions jeopardize the exempt status of white-collar employees under the Fair Labor Standards Act (“FLSA”). The loss of exempt status carries potentially serious consequences for employers.

The FLSA provides an exemption from minimum wage and overtime pay requirements for employees in bona fide executive, administrative, and professional positions. To qualify for a white-collar exemption, an employee must meet the requirements of one of the particular exemptions. The employee must also satisfy the “salary basis rule,” which requires that employees be paid a predetermined amount at a rate of at least $455 per week on a salary or fee basis that is not subject to reduction because of any “variations in the quality or quantity of the work performed.”

In its Opinion Letter, the DOL ruled that making deductions from the salary of exempt employees for damage to or loss of company equipment is impermissible because such deductions violate the FLSA’s prohibition against reductions in compensation due to the quality of work performed. As a result, a deduction made to reimburse the employer for lost or damaged equipment would violate the salary basis rule.

The DOL also held that employers may not even require exempt employees to make an out-of-pocket reimbursement for lost or broken equipment, from compensation already received, without running afoul of the FLSA. “Either approach [deduction or required reimbursement] would result in employees not receiving their predetermined salary when due on a ‘guaranteed’ basis or ‘free and clear’ and would produce impermissible reductions in compensation because of the quality of the work performed under the terms of the employer’s policies.”

Accordingly, the DOL opinion holds that employers may not safely charge an exempt employee for loss of or damage to company property, even if the employee signed an agreement pursuant to which he/she has agreed to the deduction or reimbursement.

An employer’s potential liability will vary depending upon the circumstances, including whether the violation involves an isolated incident with one individual or a pattern of conduct with respect to a number of employees. DOL regulations provide that the exemption may be lost during the time period in which the improper deductions were made for employees in the same job classification. If an employer has made deductions for lost or damaged property for a class of employees, then the exemption may be lost for all employees under the same managerial control whose pay could have been improperly docked. The potential liability could be large, depending upon how much overtime the affected employees worked, whether the employer has reimbursed the employee for the improper deduction, and other factors.